Prof. Jayanth R. Varma’s Financial Markets Blog

A blog on financial markets and their regulation

Shares pledges by Satyam promoters

The farce at Satyam Computers gets worse and worse with the company
announcing that
“The promoters informed Satyam that all their shares in the
company were pledged with institutional lenders, and that some lenders
may exercise or may have exercised their option to liquidate shares at
their discretion to cover margin calls.”. This bizarre
announcement highlights a deficiency in the disclosure requirements in
India regarding transactions by directors and other insiders.

In the United Kingdom, earlier this month, David Ross resigned from
the boards of all four public companies of which he was a director
after admitting his “unintentional” failure to disclose
that he had pledged his stake in one of the companies (Carphone
Warehouse) as collateral for personal loans. The model code on insider
trading in the UK listing rules states that “dealing” in
shares includes “using as security, or otherwise granting a
charge, lien or other encumbrance over the securities of the
company;”. Thus pledge of shares is subject to the same
disclosure requirements as other dealings in shares. Interestingly, at
the time when Ross resigned from the boards, none of his personal
loans were in default – the situation in the Satyam case appears
to be much worse.

In the US, Regulation S-K Item 403(b) was amended in 2007 to provide
that while disclosing their beneficial interest in the shares of the
company, directors must also “indicate, by footnote or
otherwise, the amount of shares that are pledged as

In India, the Prohibition of Insider Trading Regulations do not to
the best of my knowledge deal with pledge of shares. In the
Substantial Acquisition of Shares and Takeover Regulations, a pledgee
of shares is regarded as an acquirer of shares, but banks and
financial institutions are exempt from this clause. In any case, even
these regulations do not say that the pledger is regarded as a


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